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Comparative Advantage or Why CEOs are Paid More Than Workers

One of the basic principles of economics is the so-called comparative advantage. That is, every person has certain abilities, some of which are greater and other less prominent. Some of these abilities allow him to do more well-paid work, others – less well-paid. The level of payment is determined by the law of supply and demand – the more there is supply of workforce having this particular ability, the less money one can expect to be paid for it. However, what choice of work is the best for every particular person is determined by his comparative advantage

For example, an excellent lawyer who earns 500$ an hour while consulting his clients, is also remarkably good at typing. He, however, hires a secretary who types three times slower than he does. Can he be considered reasonable?

The answer is – yes. Although he may type all his documents himself and do it three times faster than the secretary does, his time costs too much for it – he can spend it consulting his clients and earning much more money than he spends, hiring the secretary. He has a comparative advantage over any other lawyer and should use it and not waste time on mundane activities that can be performed by any of his potential secretaries who are worse than he is in their work.

This principle means that, no matter how good you are at something, it doesn’t mean that you are obliged to do it for this sole reason. If you can make more money by doing something you are less professional at but what is better paid for, you should do it.